Impacts of Trades in an Error-Correction Model of Quote Prices

52 Pages Posted: 4 Nov 2008

See all articles by Robert F. Engle

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Andrew J. Patton

Duke University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2000

Abstract

In this paper we analyze and interpret the quote price dynamics of 100 NYSE stockswith varying average trade frequencies. We specify an error-correction model for the logdifference of the bid and the ask price, with the spread acting as the error-correctionterm, and include as regressors the characteristics of the trades occurring between quote observations, if any. We find that short duration and medium volume trades have the largest impacts on quote prices for all one hundred stocks, and that buyer initiated trades primarily move the ask price while seller initiated trades primarily move the bid price. Trades have a greater impact on quotes in both the short and the long run for the infrequently traded stocks than for the more actively traded stocks. Finally, we find strong evidence that the spread is mean reverting.

Keywords: market microstructure, error-correction, vector autoregression, price dynamics

Suggested Citation

Engle, Robert F. and Patton, Andrew J., Impacts of Trades in an Error-Correction Model of Quote Prices (August 2000). NYU Working Paper No. FIN-00-033. Available at SSRN: https://ssrn.com/abstract=1295235

Robert F. Engle (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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New York, NY 10003
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New York University (NYU) - Department of Finance

Stern School of Business
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National Bureau of Economic Research (NBER)

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Andrew J. Patton

Duke University - Department of Economics ( email )

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Durham, NC 27708-0204
United States

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